Diagnosis: Gold/Copper Ratio

Copper is a metal that is utilized in almost every part of global industry and has thus been given the title “Dr. Copper” because of its ability to forecast the health of the global economy. Gold on the other hand, isn’t an industrial metal; rather, it is utilized as a hedge and safe-haven asset. Thanks to our good friends the ECB, all this talk of quantitative easing has undermined investor confidence in the currency market, forcing them into gold as currency alternative.

Gold peaked in 2011 at nearly $1,900 an ounce, and has since been in a multi-year downtrend, trading now at $1,285. Gold has been trading sideways since the summer of 2013, hugging the support level of $1,190. In November of 2014, prices broke below this level, but it turned out to be a fake out, as prices have rallied nearly 14% since then. Copper, like gold, has also been in a steady downtrend since 2010, and recently breaking down to levels not seen since 2009.

In many ways, the gold/copper ratio is similar to the consumer discretionary /staples ratio as a risk-on/risk-off metric. If the ratio line is in a downtrend, investors are more optimistic about global growth and vice versa when the ratio is trending upwards.

The ratio isn’t as simple as a risk-on/risk-of switch because the increased involvement of central banks has jumbled the underlying fundamental signals of the ratio. The one important thing to take away is the sharp spike and resistance break-out of the ratio, reaching levels last seen in 2011. One signal alone isn’t enough to run for cover, but the ratio is giving a worrisome reading to say the least. 

Tom PsarofagisComment